The Michigan Business Tax (MBT) went into effect January 1, 2008. Tax exempt organizations to the extent they have unrelated business income will also be subject to the MBT.
- Two components
- Modified gross receipts tax - 0.8% tax rate, plus
- Business income tax - 4.95% tax rate, plus
- 21.99% Surcharge on the total MBT
- Who is a taxpayer — A taxpayer is defined as a person or a unitary business group. A person is defined as an individual, business, estate, trust or other types of entities. This includes nonprofit organizations.
- What is a unitary business group — To determine members of a unitary business group, the members must meet two tests:
- Ownership test: One group member owns or controls, directly or indirectly, greater than 50% of ownership interest with voting rights
- Activities and operations test: There must exist a flow of value between or among the members, or there must be integration or dependency between the members.
- The MBT tax base — The tax base for both tax components is based on unrelated business income activity for Federal tax purposes. Intercompany transactions between the members would be eliminated. Alternate tax credit is available that results in a 1.8% tax rate on business income. However, an organization (or unitary group) will not qualify if it has more than $20M in gross receipts and more than $1.3M in business income.
Special Issues for NFP Organizations
The filing threshhold is $350K in gross receipts. There is no guidance yet on whether that threshold is based on UBI gross receipts or total gross receipts. With the Single Business Tax, Michigan Department of Treasury took the position that the filing threshold was based on UBI gross receipts.
Determination of the unitary business group is based on chain of ownership. However, there is no guidance yet as to whether related, nonstock, nonprofit corporations would be treated as a unitary business group.
One of the disqualifiers for the alternative tax credit is gross receipts that exceed $20M. It is unclear whether this threshold considers only UBI gross receipts or total gross receipts for the organization/unitary group. With the Single Business Tax small business credit, Michigan Department of Treasury took the position that total gross receipts, including exempt income, would be considered to disqualify an organization from the small business credit. Large organizations with unrelated business income would be precluded from claiming the alternative tax credit despite having UBI gross receipts less than $20M. Small corporate subsidiaries of larger organizations may also be precluded from claiming the alternative tax credit because of the unitary business group rules.
Michigan Business Tax for Fiscal Year Filers
A taxpayer with a fiscal year beginning in 2007 and ending in 2008 must file two short period returns — one to report their final SBT liability through December 31, 2007 and one to report their initial MBT liability.
A fiscal year taxpayer may elect to compute the tax for the short period returns using one of two methods:
- Annual — The taxes may be computed based on the full tax year and then prorated based on the number of months that fall with in calendar year 2007 and 2008.
- Actual — The taxes may be computed based on actual business activity occurring in the final and initial short periods.
The method elected must be consistent for both taxes. Fiscal year taxpayers will be granted an automatic extension for their 2008 MBT return until April 30, 2009. However, an extension for filing is not an extension for paying the tax. Fiscal year taxpayers will be required to make quarterly estimated payments throughout 2008. In the case of a short taxable year of less than four months, no estimated payment is due. For example, organizations with a March 31 year-end are not required to make an estimated MBT payment for the period January 1, 2008 - March 31, 2008.